Government’s mistakes & missteps, pt. 2

“In business, you learn from mistakes. In government, they never do.” – Rick Scott

It has been 16 months since the Free National Movement (FNM) government assumed office. During its short term in office, the government has announced several initiatives that are designed to move the country forward. Few would deny that the prime minister’s heart is in the right place and that he wants to advance the country. However, in the past 16 months, the government has made basic mistakes and missteps that could have been avoided, if they had been better conceived and considered.

This week, we would like to continue to Consider this… What are some of the mistakes and missteps of the current administration and, more importantly, how could they have been avoided?

In part one of this series, we reviewed three examples: the government’s mishandling of the Oban fiasco, the increase in value-added taxes and the web shop tax increase debacle. In this second installment, we will examine the government’s mistakes and missteps related to the Grand Lucayan complex in Grand Bahama.

Purchase of the Grand Lucayan complex

The government fully recognizes that Grand Bahamians, who have long endured the adverse effects of the protracted economic recession that began in 2008, need a critical shot in the arm to revitalize that island’s anemic economy. We fully agree with that sentiment. In pursuit of that objective, the government has desperately sought to facilitate the sale of the Grand Lucayan complex in Freeport, unquestionably a noble objective.

The Grand Lucayan complex is comprised of three properties, namely Breaker’s Cay at Grand Lucayan, Memories and Lighthouse Pointe (collectively referred to as the Grand Lucayan complex). The properties are owned by the Hong Kong-based conglomerate Hutchinson Whampoa. Two of the three properties, Breaker’s Cay and Memories, closed for repairs after Hurricane Matthew devastated them in October 2016. Those properties have not reopened since the hurricane.

In December 2017, Canadian developer and Wynn Group CEO Paul Wynn signed a letter of intent to purchase the Grand Lucayan complex, and in May of this year stated that he hoped to complete the purchase by the summer. That sale was aborted for several reasons. Wynn attempted to renegotiate the initial purchase price of $65 million to $40 million, an offer that Hutchison rejected, resulting in the deal’s collapse.

Wynn’s inability to renegotiate a lower purchase price was exacerbated by other reasons for not proceeding with the purchase, including the enormous cost of remediating and repairing the hurricane-damaged property, the high labor and exorbitant energy costs in The Bahamas compared to other destinations and the lack of airlift required to enhance the prospects for a successful investment.

In the final analysis, Wynn assessed that the total investment would be unrecoverable, given the aforementioned factors as well as the monumental operating costs. It was estimated that Hutchinson Whampoa was losing $15 million to $20 million annually, prior to its post-Hurricane Matthew closure. Commenting on his decision not to proceed, Paul Wynn said, “The economics were challenging. It’s not for me to manage. I can’t do it – there is no fiscal feasibility to it.”

Government bailout

After the Wynn purchase collapsed, the prime minister announced that the government would purchase the property from Hutchinson Whampoa. In justifying his government’s decision to do so, the prime minister noted that it is more than just the 400 individuals who were employed there. He spoke about the domino effect that the hotel strip’s closure would have on Grand Bahama’s commerce.

The decision to purchase the Grand Lucayan complex raises very interesting questions. While no one wants to do anything that would accelerate the loss of 400 jobs at that complex, is the purchase of the Grand Lucayan a wise one, particularly at this time? We do not believe that this is a prudent course of action and could become one of the government’s weightiest millstones.

First, the government should have learned the lessons of the past when the Pindling administration became involved in the tourism sector by purchasing several hotels, also motivated by that government’s noble objectives of saving jobs. That experience proved to be catastrophic. Hundreds of millions of dollars were lost as a result of that debacle. It is generally not a good idea for governments to invest in business enterprises, particularly in those enterprises in which they have absolutely no knowledge, experience or an impressive track record.

In addition to the enormous operating costs associated with the ownership of the PLP-acquired hotel properties, when the first Ingraham administration decided to cauterize the hemorrhaging that normally accompanies hotel ownership by a government, they sold the hotels at bargain basement prices. Today, having been bought by experienced, private-sector hotel managers who know what they are doing, those PLP-acquired properties have been reincarnated with internationally recognized brands, including Sandals, Breezes and Melia, all integral to the success of the Cable Beach strip, and now greatly augmented by the destination’s crown jewel – Baha Mar.

Secondly, several months ago the minister of finance admonished the country that the government was nearly broke, that it had to be more prudent in its expenditures, and that every effort must be made to reduce the national debt. The minister attempted to persuade us that the public finances were in such a deplorable state that the government had to increase value-added taxes by 60 percent from 7.5 percent to 12 percent. So how does the government now reconcile its utterances on the wisdom of buying the Grand Lucaya complex in light of those pronouncements of expenditure restraint?

Third, the minister has repeatedly asserted that funds simply are not available for pressing infrastructural and other important needs throughout the country. Therefore, the most important question regarding this purchase is: Where will the money come from to finance this acquisition? The government has yet to explain where it will source $65 million, the purchase price that Paul Wynn rejected because it was too high.

Fourth, has the government counted the total cost that will be required to remediate, renovate and refurbish the hurricane-ravaged property to bring it to a commercially viable level? The cost will be significant. Again, how will those costs be funded? How will they be paid for?

Fifth, assuming that it will not be able to find a purchaser in the short- or medium-term, does the government have any realistic idea what will be required to operate the Grand Lucayan complex on an ongoing basis? As we stated earlier, it is alleged that Hutchison Whampoa was losing between $15 million and $20 million annually on this investment. The Bahamas government has neither the industry knowledge nor the immense liquidity of the Hong Kong conglomerate that would enable it to sustain those levels of losses without either additional borrowings or increased taxes.

Sixth, has the government made any progress finding an internationally branded, world-class hotel management team to manage the Grand Lucayan complex once it has been remediated, renovated and refurbished?

Seventh, who are the government’s advisers in this venture? From whom are they obtaining advice? Many prominent, knowledgeable, experienced persons have advised the government not to go down this road of ownership, and to explore other alternatives. Is the Cabinet taking its own counsel regarding this matter? The Bahamian people deserve to know who are the domestic or internationally renowned experts advising the government on how they should proceed? What advice is the government receiving and is it listening to such advice? There is simply too much riding on the successful conclusion of this deal for the government to either lean on its own understanding or not engage competent consultants to advise it and heed such advice.

Eighth, since coming to office, the government has retired at least 1,000 government employees from its rolls. That number represents two and a half times as many persons as those whose jobs the government is now seeking to save in Grand Bahama. How does it rationalize these divergent policy positions?

Conclusion

It could appear to the casual observer that the government’s decision to purchase the Grand Lucayan complex was a knee-jerk reaction that was born out of desperation to do something for Grand Bahamians, without fully considering the total cost of its decision.

We believe that the government’s decision to purchase the Grand Lucayan complex was a mistake that will be with us for a long time. At best, it is a risk that the government is taking with the people’s money, an investment for which the people will have to pay in the final analysis. It remains for the government to quantify the likely cost of that risk, something it has not done to date.

Next week, we will conclude this series on other mistakes and missteps of the government during its 16 months in office.

• Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.